What are REITs and how do they work?

If you’ve ever wanted to invest in property without buying a house or commercial building outright, you’ve probably come across the term REIT. But what exactly is a REIT, and how does it work?

This guide breaks down what REITs are, the different types, how they operate, their benefits and risks and some common questions investors ask.

What Are REITs?

A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-producing property. Instead of purchasing property directly, investors can buy units or shares in a REIT, which trades on the stock exchange like any other listed company.

In simple terms, REITs pool money from many investors to buy and manage a portfolio of real estate assets. These might include shopping centres, office towers, industrial warehouses, hotels or even healthcare facilities. By law in many markets, REITs are required to pay out the bulk of their income (often 80–90%) to investors as dividends.

How Do REITs Work?

Here’s how REITs operate in practice:

• Pooling of capital – investors buy units or shares in the REIT, providing capital for the trust.
• Property ownership or financing – the REIT uses this capital to purchase or finance property assets.
• Rental income – tenants pay rent, which becomes the REIT’s income.
• Distributions – most of that income (after expenses) is paid out to investors as dividends.
• Trading on the exchange – listed REITs trade on stock exchanges like shares, meaning investors can buy or sell them during market hours.

This structure allows investors to gain exposure to real estate markets without the upfront cost of buying entire properties themselves.

Types of REITs

There are several categories of REITs each with its own focus:

1. Equity REITs

These are the most common. Equity REITs own and operate real estate, generating revenue from rent and property management. Examples include shopping centre REITs, office REITs and residential REITs.

2. Mortgage REITs (mREITs)

Instead of owning buildings, mortgage REITs invest in mortgages or mortgage-backed securities, earning income from interest. They are more sensitive to interest rate changes than equity REITs.

3. Hybrid REITs

Hybrid REITs combine property ownership with mortgage lending, offering exposure to both rent and interest income.

4. Sector-Specific REITs

Many REITs specialise in a particular segment of real estate. Examples include:

• Retail REITs – focus on shopping centres and retail strips.
• Industrial REITs – own warehouses and logistics hubs, benefiting from e-commerce growth.
• Healthcare REITs – hold hospitals, aged-care facilities and medical offices.
• Hospitality REITs – own hotels and resorts.
• Data Centre REITs – operate server farms that power cloud computing.

REITs in Australia (A-REITs) vs Global REITs

In Australia, listed property trusts are called A-REITs. They’re a large part of the ASX with well-known examples including:

• Scentre Group (ASX: SCG) – operator of Westfield shopping centres.
• Goodman Group (ASX: GMG) – focused on industrial property and logistics.
• DEXUS (ASX: DXS) – diversified across office, industrial and retail.

Globally, REITs are common in markets like the U.S., Singapore and Japan. U.S. REITs in particular are some of the largest in the world, owning vast portfolios of real estate.

For Australian investors, A-REITs provide local exposure, while U.S. REITs and REIT ETFs can give access to global property sectors like healthcare and data centres.

What Are Stapled REITs?

Some of the biggest listed property companies in Australia – like Goodman Group (ASX: GMG) or Scentre Group (ASX: SCG) – don’t have “REIT” in their names, so they may not sound like REITs at first glance. 

But in practice, they operate as REITs because they own income-producing property and distribute earnings to investors. 

The difference lies in their structure: most of these large players are set up as stapled securities.

A stapled security combines two parts that trade together as one:

• Trust units – representing ownership of the property assets and the rental income they generate.
• Company shares – representing ownership of the management or development company that runs the portfolio.

This stapled model gives flexibility – the trust holds the properties, while the company can manage, develop and earn fees. It’s why groups like Goodman, Scentre, Mirvac and Dexus are considered REITs in function, even though the word “REIT” isn’t in their branding.

REITs vs Stapled REITs

The main difference is in structure and branding, not substance:

• REITs – usually simple unit trusts that own property and pass on rental income. Many newer or smaller ASX-listed REITs explicitly use “REIT” in their names (e.g. HomeCo Daily Needs REIT, HealthCo Healthcare & Wellness REIT).
• Stapled REITs – combine a trust with a management company, stapled together as one security. Examples include Goodman Group (GMG), Mirvac Group (MGR), Vicinity Centres (VCX), and Dexus (DXS). These groups often brand themselves as “Groups” rather than “REITs” but still operate like REITs in practice.

In short, both REITs and stapled property groups pool investor capital to own and manage real estate. The stapled model just adds an extra corporate layer for development and management flexibility.

Benefits of REITs

REITs offer several features that make them attractive to investors:

1. Income potential – With high payout ratios, REITs often provide regular dividends, which can be appealing to income-focused investors.
2. Diversification – REITs provide exposure to property markets without the need to own physical assets. This can balance portfolios already heavy in equities or bonds.
3. Liquidity – Unlike direct property, listed REITs can be bought and sold on the ASX or other exchanges in seconds.
4. Accessibility – Investors can access large-scale real estate with relatively small amounts of capital.
5. Professional management – REITs are run by experienced teams who handle property acquisition, leasing and financing.

Risks of REITs

Like all investments, REITs come with risks:

1. Market risk – REIT prices move with the broader share market, not just property values.
2. Interest rate sensitivity – REITs often use debt to finance assets. Rising rates can increase borrowing costs and reduce investor demand for yield assets.
3. Sector concentration – A REIT focused on one property type (e.g. retail) may struggle if that sector faces challenges.
4. Liquidity risk – While listed REITs are tradable, unlisted REITs may be harder to sell.
5. Valuation methods – Unlike shares, REITs are often valued on metrics such as Price-to-FFO (Funds From Operations), which requires understanding different accounting measures.

How to Invest in REITs

Investors can access REITs in several ways:

• Direct purchase – Buying units in individual REITs on the ASX or overseas exchanges.
• REIT ETFs – Exchange-traded funds that hold baskets of REITs, providing instant diversification.
• Unlisted REITs – Managed by property groups or fund managers, though these usually have higher minimums and lower liquidity.

Australians looking at U.S. REITs can access them through global brokers. Currency risk is a factor, as distributions and asset values are denominated in U.S. dollars.